Chemical Week May 15, 2002

Gulf Coast

Petrochemical producers on the U.S. Gulf Coast are facing hundreds of millions of dollars of investment costs to comply with EPA regulations and the State Implementation Plan (SIP) proposed by the Texas Natural Resource Conservation Commission (TNRCC; Austin) to sharply reduce emissions of nitrogen oxide (NOx) and volatile organic compounds (VOC) . Compliance with the reduction targets, which call for a 90% reduction in NOx and VOCs, could cost the petrochemical industry alone as much as $1.5 billion, says P.J. Juvekar, analyst at Salomon Smith Barney (New York). gThis could lead to permanent shutdowns of some older high-cost ethylene facilities,h Juvekar says.

The area most affected is the eight-county Houston-Galveston region, home to 28 billion lbs/year of ethylene capacity, roughly 44% of the U.S. total. Companies who own these facilities must decide if it is worth spending the money to meet the stricter requirements or shut down the plant. The ethylene overcapacity and additional expenses needed to comply with these NOx rules will force the permanent shutdown of as much as 5% of U.S. ethylene capacity, Juvekar says. Several producers have formed a coalition to lobby for an 80% reduction instead, saying that it will still meet environmental targets at a fraction of the cost. TNRCC is expected to make a decision on targets by June.

Dow Chemical has announced that it will permanently shut down its crackers at Texas City, TX and Seadrift, TX with capacities totaling 2.6 billion lbs/year. gThe Seadrift unit is too old and too small to compete on a world scale,h says Arnold Allemang, executive v.p./operations at Dow. Seadrift is outside the eight-county zone that will be most affected by the NOx rules. gThe decision to shut the Texas City cracker was, however, greatly influenced by the NOx issue,h Allemang says.

Chevron Phillips Chemical has closed a 400-million lbs/year ethylene cracker at Sweeny, TX, one of the crackers identified by analysts as a candidate for closure because of its high cost.

gClearly, compliance to the NOx reductions will raise capital expenditures and reduce economic returns,h says Jim Gallogly, president and CEO at Chevron Phillips Chemical. gOver time, it will impact the competitiveness of the Gulf Coast crackers.h Chevron Phillips is working on plans to comply with NOx reductions targets, Gallogly says. The company would not provide specifics, but says projects are in the engineering phase, and will be concentrated at Sweeny, TX and Cedar Bayou, TX, which are in the affected area.

ExxonMobilfs 750-million lbs/year unit at Houston could also be threatened by the cost needed to comply with the 90% targeted NOx emissions because of its high costs, Juvekar says. ExxonMobil did not comment.

The cost of complying with the 90% reduction target could hurt competitiveness of the Gulf Coast petrochemical industry, and even stunt its growth over the longer term, some producers say. Reducing the target to 80% could save 70,000 jobs in the Houston-Galveston area and reduce economic burden for the industry, says an industry-funded study by Dr. Barton Smith, economist and professor at the University of Houston.

Companies say they each expect to spend in excess of $100 million on average to comply with the reduction targets, depending on EPAfs decision on the reduction targets. In the meantime, producers say they are working on ways to reduce NOx emissions by building new cogen facilities, or installing selective catalytic recovery (SCR) systems. NOx is emitted from a variety of sources including chemical plants, refineries, and automobiles, but emissions from plants producing or using olefins result in higher-than-expected levels of VOCs in the air, sources say.

gIt is challenging, in terms of investment and technology, to meet requirements of the [90%] target,h says Bruce Macklin, regional director/Americas at ExxonMobil Chemical. This will force plant shutdowns and job reductions, Macklin says. The 90% reduction will thwart further expansion because there will not be enough NOx credits available for facility expansion, he says.

The final target reduction in emissions will affect how ExxonMobil develops its projects, Macklin says. The company has earmarked a 40% expansion in its global cogeneration capacity of 1,700 megawatts, some of which will be in Baytown, TX and Beaumont, TX, which will help reduce NOx emissions. Integrated cogen facilities will be 50% more energy efficient than conventional sources of electricity off the grid and will help reduce NOx emissions, he says. ExxonMobil may shut down older power generation equipment that could be an emission source, he adds.

Dow says its costs of complying with NOx emission targets would be less than $100 million if the target reductions were revised to 80%, but could run to two to three times as much if targets remain at 90%. gIt would be very, very expensive for the industryh to meet the 90% reduction targets, says Tommy Block, v.p and leader/Texas Operations at Dow. The costs do not include the new cracker, which Dow has announced it will build, either at Freeport or Seadrift, Allemang says. The decision on the cracker location, expected at the end of 2002, will be influenced in part by EPAfs decision on the targets, he says.

Dow says it is evaluating cogen facilities in Texas that will help it meet the NOx standards, and is already using new cogen facilities that have low NOx emissions in Louisiana. gWe will either convert existing power generation facilities to those with low NOx emissions, or permanently shut down those facilities and build new cogen facilities, or buy power off the grid,h Block says.

Shell is developing low NOx burners at Deer Park, TX and is moving ahead with some engineering work for installing SCR systems at Deer Park, says Steve Rathweg, global manager/manufacturing center for excellence at Shell. gIt will require a lot of R&D and highly intensive capital to meet those rules,h Rathweg says. Compliance with the NOx targets will drive up the already high costs of doing business in the U.S., relative to the rest of the world, he says. Plants on the Gulf Coast will need to be highly cost efficient to compete, he adds. gWe need highly automated processes, world-scale size, reliable supply, and efficient logistics,h Rathweg says.

Shell is focusing its investments over the next five years on systems control at its olefins plants that will update technology and increase reliability of operations, both at Deer Park and Norco, LA, two of its main sites on the U.S. Gulf. The company did not disclose its investment figures. It will also install cogen facilities to lower utility costs and lower NOx emissions, Rathweg says. An 80 megawatt/hour new cogen plant at Geismar, LA will start up in the third quarter, and a 1,000 megawatt/hour cogen unit at Deer Park in 2003.

BASF plans to install SCR systems were required at its cogen facilities, incinerators, and reformers, says Carl Jennings, executive v.p., and president/chemicals at BASF Corp. gIt will be costly, but we will comply,h says Jennings. Most of the expenditure will be at Freeport, which is most affected by the rules inside the area, he says. BASF has cogen units at Geismar, Freeport, and Port Arthur, TX. The units that do not comply with NOx reduction targets will be converted or upgraded, he adds.

BASF will moderate its investment in North America to gmore normal levels ofh about $400 million/year from 2002, compared to nearly $1 billion/year over the past few years, Jennings says. Most of the North American investments has been on the Gulf Coast, he says. This is, however, tied to market cycles, and not to environmental issues, he adds. The company started up a 2.1-billion lbs/ year cracker at Port Arthur, TX last December, a 60-40 joint venture with Atofina Petrochemicals, and will start up a 900-million lbs/year butadiene extraction unit at the same site with Atofina and Shell in late 2003.

BP says it is able to meet the 90% reduction target. The company recently awarded a contract to Jacobs Engineering to build a 570 megawatt/hour cogen facility at Texas City, TX that it says will reduce NOx emissions by 53%. BP would not disclose the value of the contract. BP says it is studying plans to build a cogen unit at Chocolate Bayou, TX.

Producers say the cost of complying with NOx reduction targets could slow down growth of the Gulf Coast petrochemical industry, but say the region is still an attractive place for the petrochemical industry because of its large, integrated complexes, sophisticated transportation infrastructure, its pool of skilled labor, and large market.

BASF says it has invested gheavilyh on the Gulf Coast over the past four years, because gwhat made the Gulf Coast attractive in the past still makes it attractive, however,h Jennings says. The region risks becoming less competitive in the world, due primarily to volatile feedstock prices, he says. The sharp swings in natural gas prices in the U.S. over the past two years are gsomething that is not experienced in other parts of the world,h he adds. Other issues such as business taxation will also impact future attractiveness of the region. gThe Gulf Coast is still attractive, but these factors could potentially make other parts of the world relatively more attractive for future investments,h Jennings says.

The region is still strong on feedstock cost and infrastructure, but issues such as consolidation of rail companies, which affects the Gulf Coast significantly because of the large concentration of production facilities in the area, and higher business taxation could potentially threaten the competitiveness of the region, producers say. gItfs not a given that the Gulf Coast will always be competitive,h Allemang says.